Applied Materials (NASDAQ:AMAT) is a company that is in the sweet spot of the two narratives within the semiconductor industry. On one hand, there is spotty activity due to oversupply and sluggish demand in end-markets such as gaming and consumer products. On the other hand, there is a shift towards next-generation technology. Applied Materials is part of the infrastructure of the semiconductor industry (NYSEARCA:SOXX) and produces the equipment and services semiconductor foundries need to make that next-gen tech.
The company reported $6.74 billion in net revenue for a gain of 7% over last year, which beat the Marketbeat.com consensus estimate. Applied Materials’ segment results have Semiconductor Systems sales up 13% to lead the company and is driven by strength in the foundry and related sub-segment. The Applied Global Services segment grew by a smaller 3.74%, but the consumer-oriented Display segment shrank versus last year.
The company’s margins contracted slightly versus last year, but the contraction was less than expected and aided by share repurchases. The gross margin contracted by 230 and 220 bps GAAP and adjusted, while the operating margin also contracted by a small amount, but earnings grew in both comparisons versus last year. The GAAP earnings set a company record, and the adjusted grew by 7% to outpace the analyst’s estimates by a dime. The company also issued favorable guidance concerning the estimates and already spurred a round of positive analyst commentary.
The price action in Applied Materials hit bottom in 2022 and is on the verge of a full reversal. The results, outlook, and subsequent analyst activity are the reason why. The analysts, specifically, have issued at least 6 price target upgrades since the Q1 release and they have the price target moving higher after hitting bottom over the last quarter. The new consensus is about 7% above the price action, which isn’t much but it is above key resistance. The neckline of a Hear & Shoulders Pattern is at the $120 level and should be considered a trigger point for the market. A move above that level could quickly get the stock up to the $140 level and a move above there would open the door to $160.
Applied Materials’ position and diversification are helping it outperform and make it an attractive buy for 2023. The company is well-positioned with leading customers at key technology inflections, has a large backlog of differentiated products, and a growing service business. The company’s capital returns also help make it an attractive buy. It has a dividend yield of 1.1% and has increased its dividend by 20% year-over-year.
In conclusion, Applied Materials is in the sweet spot of the two narratives within the semiconductor industry and is positioned to outperform in 2023. The company reported better than expected results and guidance, and the analysts have issued at least 6 price target upgrades since the Q1 release. The company’s position and diversification are helping it outperform, and its capital returns make it an attractive buy for 2023. With a dividend yield of 1.1% and a potential move above the $120 level, Applied Materials is a stock worth considering for the long-term.
